# Margin Calls

An investor buys a stock for \$50.00. The initial margin requirement is 50% and the maintenance margin requirement is 25%. The price below which the investor would recieve a margin call would be:? A) 25.00 B) 33.33 C) 37.50 D) 42.00

B

can you please show some calculations?

50 (1-50%)/(1-25%) = 33.33

Maintenance margin is 25% i.e. \$12.5. Initial margin is \$25. The maintenance call should come when the initial margin falls below \$12.5 and so the stock price should fall below 37.50.

Yo december 25 is an option in the answers…dont make it harder…

nvm

no margin call, the guys already put up 50% (\$25) and if the maintanence margin is 25% (or a 75% lending ratio from the bank) of the asset value there would be no call untull the guy has less than 25% equity in the asset. Or Maybe its different in australia!!! well they lend usually up to 70% on my margin loan then there is a 10% buffer, irrelevant I know but hey!

agree with cfaboston. answer is b)

price = \$50 initial requirement equity= 50% * \$50 = \$25 borrow = \$50 - \$25 equity at margin call = x price at margin call = (x+25) x/(x+25) = .25 price = \$33.33

hey all, i get the calculations, but i still dont understand intuitively how it all works… can someone pls explain? i dont get why, at \$33.33, you have to make a margin call? …confused…

Margin call at Price = P0 * (1 - initial margin)/ (1 - maintenance margin ) = 50 * (1- 0.5/(1- 0.25) = 33.33333 = B? - Dinesh S

>i dont get why, at \$33.33, you have to make a margin call? With the price at \$33.33, you would have \$8.33 of equity left in your account. 8.33/33.33 = 25% It’s 25% of the current price, not the price you bought at. Next question: how much would he have to deposit?

That is the maintenance margin which you always have to maintain with broker.

chrismaths Wrote: ------------------------------------------------------- > Next question: how much would he have to deposit? initial margin - is just needed to set the transaction rolling, then on, you need a maintenance margin into your brokerage account - Dinesh S

(Account Balance - Borrowed Money)/Account Balance should be greater than Maintenance Margin % When stock is purchased with initial margin of 50%, Account Balance = Stock price = \$50, Initial Margin = Money Borrowed = \$25 (Account Balance - Borrowed Money)/Account Balance = (50-25)/50 = 0.5 = 50% If price falls down to \$33.33 (Account Balance - Borrowed Money)/Account Balance = (33.33-25)/33.33 = 0.25= 25% Since 25% is the maintenance margin, the investor would receive a margin call. The formula to find the value of stock price (x) at which margin call would occur is Initial Stock Price * (1 - Initial Margin %) / (1 - Maintenance Margin %). This formula is just a restatement of (x - IM % of Po)/x = MM% of Po Po = Stock price at purchase.